'When issued' market in gilts gets approval

MONETARY POLICY 2006-07

In far-reaching reforms, the Reserve Bank of India (RBI) has given the go-ahead for the introduction of the "when issued" market in government securities.

In a 'when issued' market, trading is done in government securities which are about to be auctioned by the government. The trading happens just after the auction is announced based on expectations of the price at which the market will bid for the paper.

The RBI said guidelines covering permissible categories of securities and participants, surveillance system, limits on positions, internal control and reporting requirements have been prepared in consultation with market participants.

At the same time, the RBI is also working out the modalities for consolidation of central government securities by buying illiquid securities from the market and replacing the stock with liquid securities.

Further, in order to discipline state finances, the state governments have been encouraged to progressively increase share of market borrowings under auction instead of opting for the on tap sale route. While auction helps the states in getting a market-related rate for raising funds, the rate of interest is fixed by the RBI under the on tap sale route.

The states have also been advised to develop an advance indicative open market borrowing calendar in line with the half-yearly indicative calendar for dated Government of India securities. This, according to the RBI, would enable institutional and retail investors to plan their investments.